3 Ways Starbucks Disappointed Investors This Week

Starbucks (NASDAQ: SBUX) has been a disappointment recently, with shares significantly underperforming the S&P 500 over the past three years. And this track record worsened earlier this week when the company reduced its outlook for comparable-store sales growth in its third quarter of fiscal 2018, and revised some of its long-term strategic priorities. Starbucks stock has slid about 11% since it made these announcements on Tuesday.

As investors consider the implications of Starbucks’ updated long-term plans and its revised outlook for lower comps in Q3, here are some of the biggest issues that may be worrying investors.

Image source: Starbucks.

1. Comps are weak

In its press release on Tuesday, Starbucks said it now expects global comparable-store sales growth of just 1% in Q3. This is not only well below management’s long-term outlook for comps from 3% to 5%, but also meaningfully behind management’s guidance provided in April for 3% comps during the quarter.

This comes after two consecutive quarters of global comps of just 2% — also below Starbucks’ long-term outlook for the key metric.

Initially, Starbucks was aiming for 3% to 5% comps in fiscal 2018, but management revised this outlook earlier this year to expectations for hitting the low end of this range. Yet with 2% comps in the first and second quarter of the year and 1% growth in Q3, hitting 3% at all now appears unlikely.

2. Frappuccino sales were softer than expected

One area where Starbucks performed worse than expected in its third quarter was with its popular Frappuccino drinks. Frappuccino sales growth rates have fallen from 17% year over year in fiscal 2015 to a 3% year-over-year decline in the year to date through May, which CEO Kevin Johnson explained during a presentation to investors on Tuesday:

The category of what’s called slushie coffee, which is what [our Frappuccino] falls under, is in decline [across the industry]. … Now these are oftentimes more indulgent beverages, higher in sugar, higher in calories. What we’re seeing is, then, consumer shifting to healthier beverage choices, better-for-you beverages.

Management had expected Frappuccino sales to be worse than in the year-ago period, but sales were still softer than anticipated.

3. China comps are taking a hit

Perhaps the most disappointing news from Starbucks’ update on its business was the company’s gloomy expectation for comparable-store sales growth in China during its third quarter. Management said it expected comps to be between flat and slightly negative during the period.

China comps have steadily decelerated from 8% growth in the fourth quarter of fiscal 2017 to just 4% growth in Starbucks’ most recently reported quarter. With this backdrop, it’s easy to see why management’s expectation for flat to slightly negative comps in its third quarter may worry some investors.

Putting all this together, Starbucks now expects earnings per share for the year to be between $3.23 and $3.26, down from previous guidance for $3.32 to $3.36. It expects non-GAAP EPS between $2.39 to $2.43, down from previous expectations for $2.48 to $2.53.

There was other news alongside these updates on Starbucks’ business this week, namely a 20% increase to its dividend, and plans for digital initiatives that management believes will help add one to two percentage points to its comps growth in fiscal 2019.

But investors seem mostly focused on the bad news from this update. Until Starbucks can start hitting its targets, investors will have a difficult time taking any optimistic forward-looking commentary seriously.

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